The Doís And Doníts of Buying a Franchise
Buying a franchise is a huge commitment. Youíre investing a lot, both financially and emotionally, and a contract should only be entered in to after thorough consideration and research.
Failing to do your due diligence may lead to buying a franchise that is poor value for money, or worse, has a business model that doesnít meet your expectations.
Donít know where to start? Youíre not alone. You may have never have had to perform any form of due diligence before, and the thought of getting something wrong can be scary, and a bit intimidating at times.
So, here are some essentials you should complete before you sign the franchise agreement:
1. Review the franchise agreement carefully
It's hard to believe that some franchisees don't read their franchise contracts entirely before they sign on the dotted line. It does happen though, and this is because they tend to be lengthy and complicated documents which can be challenging to decipher.
You must overcome this barrier though and thoroughly assess the obligations, limitations and fees detailed in the agreement. You should never agree to a contract without having a full understanding of whatís expected of you, both professionally and financially.
During your assessment of the franchise contract, you should make a list of parts that you donít understand or which require more information. You should then pose these questions and concerns to the franchisor, your accountant and your solicitor.
2. Consult the professionals
As stated above, itís important to consult your accountant and solicitor as early in the franchise purchasing process as possible. It's also recommended that you hire professionals that specialise in franchising. Many elements are unique to franchising, and generic accountants and solicitors may not have the knowledge or experience to provide you with the best advice.
If youíre unsure of where to find experts to consult, thereís a list of affiliated professionals on the British Franchise Association website.
3. Do your research
In this digital age, itís possible to find out a lot of information about your chosen franchise before you become a franchisee. From the franchiseís website, youíll be able to gather a wealth of information including whatís contained in the franchise package and how much investment is required.
However, your research needs to go deeper than just whatís available from the franchisor. You also need to validate projected profit potential provided by the franchisor and analyse the market opportunity.
4. Question existing franchisees
Itís easy to get carried away with the positive and enthusiastic pitch that the franchisor gives to persuade you to invest in their franchise. But whatís it really like? You should ask the franchisor for a list of existing franchisees and ask them what itís like to be part of the franchise. Theyíre more likely to give you an honest review of the performance of the franchisor and the franchise.
5. Secure funding
As well as doing your checks on the franchise that you're buying, it's essential that you also have a sound understanding of your own financial situation. Firstly, youíll need to assess how much personal contribution you can afford. Most banks will lend a maximum of between 50% and 70% of the total start-up costs, but youíll have to fund the rest. The British Franchise Association website details the high-street banks that have specialist franchise departments.
Be aware though, that buying a franchise costs more than the initial franchise fee. The total investment required will include expenses such as rent, working capital, VAT and professional fees.
Now you know what to do before making a franchise investment, hereís a list of things you definitely shouldnít do:
1. Rush in
Excitement, nerves, enthusiasm: when you're about to start your own business, you're likely to be on a rollercoaster of emotions. But don't let your feelings cloud your judgement or lead you to rush into deciding before you're ready to do so.
2. Get your timings wrong.
There are lots of different elements to come together when youíre buying a franchise and getting the timings right can feel frustrating and stressful at times. For example, itís best practice to try and get your franchise agreement and the lease on your premises to start at about the same time. But itís not always easy.
If you canít coincide these two dates, you may be left in a situation where you have to pay rent for a few of months before you can start trading. Ideally, you donít want to start your new franchise without paying out more money than you already have to.
3. Underestimate the costs
The biggest reason for franchisees failing to make their business a success is lack of cash flow. Being undercapitalised can ruin a franchise that may even look successful from the outside. It's important to remember during the budgeting process that purchasing a franchise costs more than just the franchise fee and ongoing costs.
Many expenses occur during the start-up phase for which you also need to budget. Working capital is required to cover business-related costs until your franchise is in a position to fund itself. These expenses can include equipment costs, insurance, professional fees and day-to-day operating costs.
As well as business-related costs, remember that you'll also need to cover any personal bills that you may have in the early days of your business. You'll be the last person to receive any money when you have staff wages, rent and invoices to pay, so you need to make sure you have enough capital to live comfortably too. Experts recommend having at least 12 monthsí worth of working capital available before starting a franchise.
Performing due diligence is essential before you enter into a franchise agreement. Although it can take time, money and effort, you should view due diligence as an investment to make sure that you make the right decision to give your new franchise the best possible chance of succeeding.
The Editorial Team, Point Franchise ©
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